ASTIN Bulletin: the Journal of the International Actuarial Association, April 2023, ISSN: 0515-0361
Inaugural Chris Daykin Award
We study a fully funded, collective defined-contribution (DC) pension system with
multiple overlapping generations. We investigate whether the welfare of participants
can be improved by intergenerational risk sharing (IRS) implemented with a realistic
investment strategy (e.g., no borrowing) and without an outside entity (e.g., share
holders) that helps finance the pension fund. To implement IRS, the pension system uses
an automatic adjustment rule for the indexation of individual accounts, which adapts to
the notional funding ratio of the pension system. The pension system has two parameters
that determine the investment strategy and the strength of the adjustment rule, which are
optimized by expected utility maximization using Bayesian optimization. The volatility
of the retirement benefits and that of the funding ratio are analyzed, and it is shown
that the trade-off between them can be controlled by the optimal adjustment parameter
to attain IRS. Compared with the optimal individual DC benchmark using the life-cycle
strategy, the studied pension system with IRS is shown to improve the welfare of riskaverse participants, when the financial market is volatile.
Type:
Journal
Date:
2023-05-17
Department:
Data Science
Eurecom Ref:
7257
Copyright:
© Cambridge university press. Personal use of this material is permitted. The definitive version of this paper was published in ASTIN Bulletin: the Journal of the International Actuarial Association, April 2023, ISSN: 0515-0361 and is available at : https://doi.org/10.1017/asb.2023.18
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